The moments right before the horns blast indicating the start of a regatta are always exciting. There is a certain confusion, there are mixed strategies, sudden changes due to the wind, all of which seem to mark, to a great extent, the destiny of each boat.
Today our sector is going through a similar situation, aggravated by the fact that we are not actually sure we heard the signals counting down the time before the start.
There will, however, be a regatta. I want to believe, and need to believe that it will not be cancelled due to lack of wind or anything else. There must be a regatta. Let me try to explain myself.
The pension reforms passed by the government show a scenario for the next 15 years which plans a gradual decrease in the replacement rate to levels of about 60%. That’s very near to the 55% average of other nearby countries. And with this, a decisive problem arises that seems impossible to put on hold: The solvency of the public pay-as-you-go scheme. The first and until now, practically only source of resources of our pensioners, and therefore cornerstone of the economy and of social cohesion.
However, the solution that was adopted – to maintain a source of income that ensures adequate financing by reducing loans – immediately poses another question concerning another adequacy, in this case, the level of pensions in the widest sense of the word. And this is just as critical, or more so, that the first question.
In short, no developed country can allow a significant percentage of their population to be lacking in sufficient economic resources. It cannot do so for neither for social justice nor for the functioning of the economy.
In this scenario, the systems of capitalization in the long term will have no choice but to play an important role and in this context, insurers have a great deal to contribute. This is our regatta.
That said, knowing that the two possible activators of a horn blasting – a legislative boost in which the government takes on the responsibility in a global way for pensions, or a significant change in savings patterns and payments both to individuals and to companies – are difficult to predict, I will focus on identifying some of the aspects that will have an influence on our market during this year 2014 coming from a 2013 that just like the previous year, has seen a fall in total premiums.
From a demand point of view:
- The continuous debate concerning pensions is generating a consciousness that will boost the market and pick up speed. The information from the government concerning the expected pension amount will not come before the end of the year, so it will not affect this financial year but for the first time since the tax reform of 2007, we have noticed in 2013 an upturn in contributions to individual pension plans which has been especially significant in the last quarter.
- The reform in social security contributions will have a negative impact on employment pension schemes. Especially in small and medium sized companies.
- The sharp decrease in deposit amounts and the tendency of an upward curve for interest rates makes insurance products with long term guarantees particularly attractive. In fact, it seems that the relatively good results of traditional distribution insurance companies in 2013 could well be showing part of this phenomenon. The good profits made by the products managed (unit linked, mixed plans) will also make them more attractive in comparison to savings.
- The business market will probably continue to reduce in size both in terms of risk and also in savings because of a fall in redundancy plans, absence of new commitments, and of being badly affected by legislation (a limit of €10,000, social security contributions…) that they have suffered from in recent years in addition to pressure on pricing.
- The process of levering families who designate almost half of their savings to reducing debt, while it lasts, will continue to drag financial investment. The key will now be to recover confidence levels in order to reverse this trend.
- On the other hand, we can expect the historically great competitor in financial savings, that is, the investment in housing, to maintain current levels for a long time given that a tendency to rent seems to be emerging rather than ownership.
- Finally, the abundant liquidity that in 2013 has caused automatic bonds to mature and hybrid instruments to fall into private hands will not exist in 2014.
- A less destructive installed capacity of the banking industry, that represents 70% of distribution, and a greater focus on growth once the majority of the restructuring of the system has finished, should help to stabilize and stimulate growth in insurance bank distribution.
- Agency networks themselves have the significant combined opportunity of being able to present an attractive offer in comparison to a banking product, the ability to capitalize on the banking industry’s bad reputation and to meet client needs for assessment in terms of protection and retirement. And there are institutions working hard in this direction.
- Finally, the relaxing of risk premium and hesitations about our country as well as the agreement on the LTGA package in solvency II, should also help some foreign insurance companies to once again offer guaranteed produces based on Spanish investments.
To sum up, we have a panorama of uncertainty as far as supply is concerned, with darker and brighter outlooks in the contributing factors, and an uncertainty as to the speed in which the underlying strength will materialize, which I firmly believe will propel growth in the medium term. However, out of supply we can gain the capacity to lead and boost market growth by supporting ourselves and anticipating different opportunities that arise.
It is therefore, a market dominated by supply, which depending on the strategies taken, will have clear winners and losers. Where some will begin, have already begun the voyage, and others will continue to look towards the boat of the regatta organizers, waiting for the signal.
José Antonio Iglesias
Marketing and Business Development director of VidaCaixa